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Auditor’s Corner – Be Wary of Fictitious Vendors

By Emmet R. Wood
Director, Audits and Investigations

Does your real estate company manage a number of rental units or property owner associations? If so, do you maintain a list of vendors approved to provide products and services to them?

Special problems are posed when a real estate company pays various vendors to perform repairs on rental properties or to maintain the common elements of property owner associations.  Consider, for example, the following scenario:

A real estate company that manages a number of property owner associations employs a bookkeeper who is authorized to write checks to pay the various vendors.  Unknown to the company the bookkeeper obtains a post office box in the name of a fictitious maintenance company and then proceeds to embezzle money from the property owner associations by paying the fictitious company for work that was never performed.

In this real-life example of a case that came before the Real Estate Commission, the embezzlement may have continued to go undetected had the bookkeeper’s supervisor not noticed that checks written on the bank account of the property owners association were in whole dollar amounts ($500, $400, etc.) and that the vendor’s address was a post office box.

Some basic internal controls could likely have prevented the embezzlement. The first internal control might have been for the company to maintain a vendor list with the vendors being approved by someone other than the person authorizing repairs. Another internal control would be for the supervisor of the bookkeeper or accounting clerk to monitor the vendor list for additions and deletions.

And always be alert to general warning signs that someone may be embezzling from your company.  Is an employee living beyond his or her means? Do you have an employee whose personal problems suddenly disappear? Do you have a vendor with the same address or telephone number as an employee?  Do you have a vendor whose address is a post office box only or does not have a telephone number?  Are there missing invoices or other documentation?

Be on the look out for anything that appears suspicious or that simply doesn’t make sense.

This article came from the March 2006-Vol36-3 edition of the bulletin.